US President Donald Trump’s war with Iran was always unpopular at home. What made it tenable is that the American economy, buoyed by oil exports and an artificial-intelligence boom, seemed almost recession-proof. With the Strait of Hormuz still disrupted, however, even the world’s largest economy needs to reckon with the possibility of a downturn.
Until recently, economic forecasts were relatively benign, especially for the United States. When the International Monetary Fund (IMF) updated its global projections earlier this month, its so-called baseline scenario still had world output expanding 3.1 percent this year. Only under its “severe scenario,” which assumed crude prices averaging $110 per barrel in 2026 and $125 in 2027, did the IMF foresee global growth falling below 2 percent, a pace consistent with outright contractions in many countries.
That hypothetical future no longer feels far-fetched. The key Brent crude oil price has traded persistently above $110 per barrel over the past week, even briefly surpassing $120 on Thursday.
On Thursday, official data showed a rebound in US GDP in the first quarter: output expanded at an annual 2 percent. This is far above growth rates in the euro zone and the United Kingdom. American unemployment, at 4.3 percent, remains low.
Consider the 1990 Gulf War, though. The US economy enjoyed solid growth and near-full employment at the time. But labour demand was softening and households were starting to get worried amid the savings and loan crisis. When oil prices surged 150 percent, consumer confidence collapsed and real-terms spending stalled. The Federal Reserve, constrained by rising inflation, was slow to ease policy.
Many of those conditions are echoed today, including a divided Fed likely to resist pressure from its new chair to cut rates. Surveys already show depressed consumer sentiment and higher inflation expectations.
Comparing oil shocks across decades is complicated by the fact that richer households now spend a smaller share of income on energy. In recent years, energy goods and services have accounted for less than 4 percent of US disposable income, compared with about 5 percent before the Gulf War and 6 percent ahead of the 1970s crises.
One way to bridge that gap is to examine how much households are forced to raise that share when energy prices jump. One rule of thumb is that a 1 percent increase in American WTI oil prices typically lifts energy spending by roughly 0.22 percent. After July 1990, the energy share of household incomes rose by about 0.3 percentage points, enough to tip the economy into recession, since higher energy bills forced consumers to cut spending elsewhere.
A shock of a similar size would emerge today if crude prices stayed where they are. And if oil hits $150 per barrel, the increase in the energy share would be 0.7 percentage points of disposable income. With oil at $200 per barrel, it would rise by a full percentage point. That would still be milder than the 1970s, but enough to hurt badly. Though far from certain, every new day makes a US recession look less outlandish.
US President Donald Trump will receive a briefing on April 30 regarding plans for new military operations in Iran, according to a report by Axios. It triggered renewed fears among traders of a monthslong standoff in the Middle East, sending oil prices up.
As of 1145 GMT on April 30, Brent crude and US WTI futures were trading at $114 per barrel and $104 per barrel respectively.
